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US banks join European rivals on short sellers’ target lists

By: David Walker | 30 Jul 2012

Financials in Spain and Italy have been protected from extra short selling pressure since last week, but analysis by Deutsche Bank suggested already by last month short sellers were also turning their attention to American financials.

The German bank attributed the unwanted attention on US financials to a slew of downgrades by Moody’s on 28 June.

The bank’s Hedge Fund Trends report for that month showed in Spain banks were “strongly located” by short sellers. The inventories of shares available for lending of some names were “close to being fully utilized” for some of the regional banks.

Caixabank (20% shorted), Banco Popular (35%), Bankia (65%) and Banco Sabadell (10%) were the most heavily shorted financials in Europe, and Deutsche noted “we see little appetite to close out these shorts”.

Short selling is betting the price of a security will fall. The participant borrows the share from a holder – typically institutional investors – and sells it into the market, hoping to be able to repurchase it later for less, return it to the lender, and pocket the price difference.

Fearing disorderly markets, both Spain and Italy banned the building of fresh short positions early last week. In Italy the veto has been extended to mid-September on 29 bank and insurance stocks; in Spain the moratorium lasts for three months from 23 July, and includes equities, OTC and exchange-traded derivatives.

But analysis by Deutsche Bank suggested by June hedge funds were focusing on US financials as well as European ones, not least because of the Moody’s cuts.

Deutsche said the move would “further divide the world’s biggest banks based on their strength and access to cheap customer deposits”.

Short interest in financials in the S&P 500 index increased by 31% in the second quarter of 2012, with the diversified financials sector the most heavily shorted sector in that period (short interest up 43%). Notable targets were SLM Corp (short interest up 129.3%), Nasdaq OMX Group (up 120.4%), Franklin Resources (up 83.3%), Bank of America (80.3% higher), and Goldman Sachs (up 63.4%).

The top US financial stocks with the biggest increase in short interest as a percentage of their overall float were Federated Investors (16.2%) and Zions Bancorporation (9.1%).